Brianna McGurran, NerdWallet
“Ask Brianna” is a Q&A column from NerdWallet for 20-somethings or anyone else starting out. I’m here to help you manage your money, find a job and pay off student loans — all the real-world stuff no one taught us how to do in college. Send your questions about postgrad life to askbrianna@nerdwallet.com.
Q: I’m already struggling to pay back my student loans. Will a Trump administration make it better or worse?
A: This is a tough one. President-elect Donald Trump and the Republicans who now have a majority in both houses of Congress didn’t focus much on higher education during their campaigns, says Jason Delisle, resident fellow at the American Enterprise Institute, a right-leaning think tank in Washington, D.C. That makes predicting the next four years of student loan policy tricky.
“We’re left a little bit empty-handed,” Delisle says.
But Trump recently spoke about simplifying a program that lets student loan borrowers repay their loans based on their incomes, which some policy experts have recommended for years.
Here’s how it works now: If you’re struggling to afford your monthly student loan bills, federal income-driven repayment plans will cap them at a percentage of your income. On the Revised Pay As You Earn (REPAYE) plan, introduced by the U.S. Department of Education in December 2015, payments are no more than 10 percent of your income, and your loans are forgiven after 20 or 25 years. You’ll be taxed on the amount forgiven.
REPAYE is one of five income-driven plans. They each have small differences in their benefits and requirements, and they all involve a thorny application process. You must apply through your student loan servicer and recertify your income every year. That means if you suddenly lose your job — meaning you qualify for a $0 payment — you can’t get relief until you fill out a form and wait until your loan servicer processes it.
Trump said in an October speech in Columbus, Ohio, that he’d replace the current maze of plans with a single program. The plan would limit student loan payments to 12.5 percent of income, slightly higher than REPAYE’s cap, and forgive the remaining balance after 15 years, five to 10 years sooner than the current options offer.
MORE CHANGE NEEDED
A simpler income-driven repayment program would be refreshing news for many borrowers. But those most at risk of default may need more help. Former students who attended community colleges or for-profit colleges, for instance, are less likely to complete their studies or see a boost in earnings — and they often can’t keep up with student loan payments, according to a report published in the Brookings Papers on Economic Activity.
One possibility for improving the income-driven repayment program is to eliminate the need to apply in the first place or to reapply every year. By automatically enrolling all borrowers, even those most likely to default could start repaying their loans as soon as their first bill is due. The government could set payments based on borrowers’ current income and collect them directly from paychecks, a process called payroll withholding. That would ensure that borrowers’ payments drop or stop as soon as their incomes do.
Making payroll withholding work would mean navigating many bureaucratic hurdles, but it’s possible.
“There are countries that have figured it out and it’s happening at full scale,” says Susan Dynarski, professor of public policy and education at the University of Michigan. Those countries include Australia, Britain and Chile, according to Dynarski’s paper “How to — and How Not to — Manage Student Debt.”
NO NEED TO WAIT ON TRUMP
As for the U.S., both Republicans and Democrats have expressed interest in improving the federal government’s student loan repayment options, says Matthew Chingos, senior fellow at the Urban Institute, a left-leaning think tank. But the scale of the possible change isn’t certain.
“I don’t know if we’d see an Australia-style system where it’s done automatically through the tax system, but we might see some consolidation of those plans, streamlining of those systems,” he says.
In the meantime, you can sign up now for REPAYE, or any of the other plans you qualify for, at studentloans.gov. The current options and recertification requirements aren’t perfect, but income-driven repayment could keep you from feeling overwhelmed by your bills.
“Consumers need to understand that these protections already exist,” Chingos says. “They’re not out of luck.”
